I’ll spare you the boring synopsis of the company and get directly into describing the trade and my reasoning behind it. Trading the long call is merely an options bet, and generally a bet with a very low probability of success.
Only time can tell if this one will pay off but lets take a look at why I might be crazy enough to like this trade.
Have a look at the chart for Verizon (VZ) to begin.
Verizon Long Call 5-1-17
Analysis
Chart suggests Verizon may continue lower.
Pros to this options bet:
- Higher volatility could offset some time decay in short term.
- Verizon trading at a support level
- RSI oversold
- Volume declining
- Slight MACD price divergence
- Extreme open interest on the call side
Cons to this options bet:
- MACD is under the zero line pointing lower.
- Volatility is elevated
- Price trading below all 3 moving averages
- VZ missed their earnings mark
- Extreme open interest on the call side
Clearly, this is a weak chart. There are plenty of reasons to avoid a trade, especially to the upside, in the midst of a sustained downtrend.
Rationale
Ok, so let me explain my thought process for taking a trade against the grain.
First, we’ve all heard of Verizon and generally speaking they are profitable(I.e. not likely to go bankrupt). That doesn’t mean Verizon’s share price will stop its descent it just means they are still making money and most would likely agree price can rebound.
Second, I’m noticing some unusually skewed volume in the options market to the call side. Sure, there is no way for me to know which side of the trade is the market and which side is the maker. I just choose to believe a simpler truth, increased volume means more people like the song and want to hit the dance floor. I’m hoping this increased interest will lend itself well to a possible retracement or even better a full on reversal.
That’s it, not to bad right? Nothing to crazy or over hyped. Just a belief VZ has weathered the toughest part of their decline and that likely we’ll see price move higher in the intermediate future.
Actual Trade
Now that I understand this is just an options bet and nothing more, I should avoid being too aggressive. To do this, an OTM long call is a perfect trade. Its cheap and has the advantage of unlimited profit potential. For a full review of long calls check out my long call education page. For an explanation on the long call strategy from a credible source check out Investopedia’s long call page.
Here is a picture highlighting the actual trade and the higher than normal volume in several call strikes.
Verizon July 2017 Option Chain
So there is my actual trade sitting next to the green position banner. I’m long the 21 July 17 50 strike with 78 days to expiration.
More interesting though is the open interest disparity between calls and puts. Furthermore, this is the only option chain showing such lofty open interest levels. So for $18 I decided to jump in with the sharks.
Total investment – $.18 or $18 for 1 contract
Targets
Any updates to this trade will be added to this page when available.
With 78 days until expiry I’m looking to hold this call until one of the following conditions is met. One, Verizon shows no life and continues lower over the next month. Two, Verizon’s share price increases and doubles my investment.
I will also add that should they double my investment, I’m going to close this trade and reinvest the money with another nearer the money option, possibly a long spread.
UPDATE
This trade was allowed to expire worthless. Worth noting, two days after expiration price accelerated quickly to the 50$ strike price and would have become profitable if only I had more time!! lol
Trade Happy,
Jeff “the OptionBoxer”
